The outcome of Italy’s constitutional referendum on December 4th will probably have limited immediate impact on either the economy or the political system. The medium to long-term implications, however, could be severe. With a streamlined political system and a renewed commitment to reform, Matteo Renzi could finally address some of the deep structural flaws that have reduced Italy’s growth potential to near zero. On the other hand, while we consider the risk that a No majority causes a full-blown political crisis as rather small, it would leave Italy with a lame-duck administration until 2018 (in the best case), push constitutional reform into the long grass and significantly reduce the outlook for economic renewal. If the eurozone’s third largest economy does not grow in the medium to long term, the sustainability of the euro might be at risk down the line.

Allianz SE
Munich, Oct 27, 2016

What is at stake?

Italians are set to vote on a reform of the Senate, the upper house of parliament, on December 4th. This reform (already passed by both houses in two rounds, as required for constitutional changes) would abolish the “perfect bicameralism” that has rendered governing Italy so difficult in the post-war period. The Senate would be reduced to a (much smaller) chamber of regional representation with very limited law-making competences. Future governments would solely depend on parliamentary support in the Chamber of Deputies, the lower house. The constitutional changes are much more wide-ranging, including a clarification of competences between the regions and the central government. Since the abolition of the second chamber in its current form is the most consequential of the proposed changes, we refer to the bundle of constitutional changes as the Senate reform.